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Shareholder Values

"Forty-five percent of U.S. households prefer an environmental, social and governance (ESG) approach to investing… Among those between the ages of 30 and 39, this increases to 64%, and for those younger than 30, it is 67%."
-- Cerulli Associates
    October 2018

"While 77% of respondents said they want their financial services provider to inform them about responsible investments that are aligned with their values, only 27% said they had ever been asked if they were interested."
-- Responsible
    Association (RIA)
    December 2021

"70% of people [in UK] want to invest ethically but the financial services industry is failing to respond." Referencing research by Abundance.
-- Acquisition
(UK) June 2015


March 13, 2009

Can SRI Ratings Predict Corporate Behaviour?

by Ron Robins*

So far there are only a few studies in this area and at best they point to weak linkages between an individual company′s SRI (socially responsible investing) ratings—as assigned by ratings agencies—and its subsequent corporate behaviour.

The first study I will review is, Imitate or Differentiate? Evaluating the validity of corporate social responsibility ratings, by Aaron K. Chatterji (Duke University), and David I. Levine (University of California), published in February 2008. This study analyzed data from top SRI ratings firms which included KLD Research & Analytics, Inc., Calvert Group, FTSE4Good, Dow Jones Sustainability Indexes, and Innovest Strategic Advisors. The focus was on the raters′ ability to predict which companies they followed would later get involved in scandals. Regrettably, the results found that raters could not predict which companies would become embroiled in them.

Firms with both high and low ratings were equally likely to be entangled in scandals, according to the researchers. Furthermore, neither a “… narrow focus on governance or a broad measure of social responsibility (including charitable giving, environment impact, product safety, etc.) seems to distinguish firms that will have major scandals from those who will not.”

However, in another study we see some glimmers of hope with SRI raters in predicting corporate behaviour relating to the environment. The study is titled, How Well do Social Ratings Actually Measure Corporate Social Responsibility? Researchers again included Aaron K. Chatterji and David I. Levine, but now also included Michael W. Toffel (Harvard Business School). Focusing on KLD′s SRI screening, they concluded that, “… firms with more KLD ‘concerns′ have slightly, but statistically significantly, more pollution and regulatory compliance violations in later years. [However], KLD environmental strengths [ratings], in contrast, do not accurately predict pollution levels or compliance violations.” The researchers say that KLD might be able to significantly improve upon their predictive ability in the environmental area with adjustments to the way they gather and use data.

Of course, besides looking at corporate scandals and environmental concerns, there are many other variables that could be studied. Hopefully, in time such research will be completed and provide us with a better understanding and modelling methodology to improve the predictive power of SRI corporate ratings by rating organizations.

However, there is recent evidence that ratings can encourage companies with poor ratings to perform better. In the 2008 study, How Firms Respond to Being Rated, again by Aaron K. Chatterji and Michael W. Toffel, and covering 600 firms in the USA rated by a prominent social rating agency, they say that, “While negative ratings may ‘shame′ firms that are performing poorly, the threat of regulatory action and the presence of ‘low hanging fruit′ are important drivers of how firms respond to information-based incentives [like SRI ratings].”

Congratulations to Aaron Chatterji and his colleagues in pioneering this important area of research. Most likely many others will join them in such research and in time create a set of variables that have greater predictive power in determining corporate outcomes and activities.

My next editorial reviews the ability of SRI raters′ ability in foretelling an individual company′s stock market performance. Similarly, the possibility of SRI raters in predicting the outcomes of groups of stocks and portfolios will be examined as well. And these results are more promising.

* Ron Robins, MBA, is founder, Investing for the Soul (http://investingforthesoul.com/), Huntsville, Ontario, Canada. He advocates, teaches, and writes on the subject of ethical investing. To contact him, e-mail to Ron Robins or call 705-635-3034.

© Ron Robins, 2009.

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Disclaimer: This website does not make investment recommendations. Nothing in this site should be interpreted as a recommendation or solicitation to buy/sell any securities or investments. Investing for the Soul is a source of general information and resources for ethical investing and socially responsible investing (SRI). Investors should consider their actions thoroughly and consult their financial advisers and other professionals, prior to taking any investment action. This website does not necessarily agree with the opinions expressed in articles on its pages or offered on the web pages to which it might be linked. Such opinions are the responsibility of the writers themselves. Furthermore, this site does not offer or provide any warranties, representations, guarantees, implied or otherwise, as to the accuracy, legality, copyright compliance, timeliness or usefulness of the information, materials or services on this, or other sites, to which it is linked. Also, Mr. Ron Robins is not an investment advisor, nor is he licensed with any professional investment related body, and thus is not able to, nor does he make, any investment recommendations.


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